‘We’re in Fifth Inning,’ Howard Marks Says of Current Credit Cycle

Howard Marks is becoming the Warren Buffett of the private equity world.

Citing investment adages one after another in public speeches and writing memos that are sought after by clients and the general public alike. Those are just some of the similarities between the chairman and co-founder of Oaktree Capital Management and the Oracle of Omaha.

Unlike Mr. Buffet, whose Berkshire Hathaway is in the deal for H.J. Heinz Co., Mr. Marks isn’t associated with blockbuster buyouts, at least not recently and not on the equity side. His Oaktree, the Los Angeles firm that specializes in credit and now is expanding further into real estate investing, has bought distressed debt of troubled buyouts–and as such, stands to benefit should any of those deals go sour.

TXU Corp., now known as Energy Future Holdings, is one such example. Oaktree owns debt in the Texas utility and power generation company that is reportedly contemplating a split that would facilitate a debt restructuring.

Speaking at the 19th annual Columbia Business School Private Equity & Venture Capital Conference on Friday in New York, Mr. Marks didn’t comment specifically on the Energy Future situation. He did say immediately following the Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, Oaktree swooped in to scoop up senior debt of large leveraged buyouts at “giveaway prices.”

Mr. Marks said that in the fourth quarter of 2008 alone, Oaktree spent $500 million each week to buy the most senior debt of large buyout companies, at prices that valued the entire company at about one-fifth to one-third of the original buyout valuation.

“If they go bad, we become owner of the companies,” said Mr. Marks. “If they don’t go bad and they pay us off, it’s not the worst thing, either.”

Oaktree executives have said in the past that the current frothiness of the credit markets is sowing seeds for the next distressed cycle, which Oaktree stands ready to invest in.

In response to a question at Friday’s conference about where we are in the current cycle, Mr. Marks said, “We are in the fifth inning.”

“We haven’t reached a point where Warren Buffet would call nutty,” he said.

Nonetheless, he said, “imprudent behaviors” has returned, with high-yield bonds yielding less than 6%, for example. Mr. Marks took a whip at dividend recapitalization as an example of such behaviors. Different than using leverage to fund an add-on deal, which adds to a company’s assets and cash flow, he said, dividend recap simply puts more debt on a company’s balance sheet without adding to the assets.

“If anybody can do a dividend recap for any company at any time, that’s probably excessive,” said Mr. Marks.

The pending megadeal for Dell Inc., while not serving as a harbinger of more multibillion-dollar buyouts to come, still shows we are moving deeper into the credit cycle, said Mr. Marks.

“If Dell gets done, maybe that will move us to the sixth inning, but not to the ninth inning.”

When asked when he thinks interest rates will rise, and therefore stop the music on debt markets and potentially hurt returns of credit investors, Mr. Marks said he doesn’t like to predict future. He did cite the Federal Reserve’s commitment to keeping interest rates low through at least 2015. The caveat, he said, is how the unemployment rate and the inflation rate change over the next two years, which may cause the Fed to change course.